Category Archives for Invest & Retire
How to Avoid Taxes at Retirement
The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.
Don’t you just love paying taxes?
Of course you don’t. Nobody does. Sure, some of the taxes we pay are for the good of the community, but it seems that much of the funds are spent for products and functions that we could care less about. Often times, I figure it would be best if I could just avoid as many taxes as possible, which is how this article came about. If you are interested in keeping your money, rather than gifting it to the government, you may want to keep reading.
1) A Low Income During Retirement
Just like when you’re working, your tax bracket is dependent on how much you earn each year. If you can live off of very little, then you will land yourself into a very low tax bracket and only owe the government a miniscule amount.
I know this might not sound like a great solution (since you might be assuming that you have to live an unhappy life just to avoid paying taxes), but if you have absolutely no debt then how much do you really have to spend to survive? You’ll need some money for food, clothing, insurance, and gas. That’s pretty much it. A happy life can be had for less than $1,000 a month (believe me, I’ve done it, and that was with a mortgage payment!).
If you plan to retire before the age of 59 ½, don’t sweat it, this plan will still work for you. According to Section 72(t) of the tax code you may withdraw a set amount each month from your 401k and receive no penalty. So, if you have no debts and are able to live off of very little, then this tax avoidance method should work fantastically for you.
2) Contribute to a Roth IRA
If you are worried about paying taxes during your retirement, then why not just get them out of the way now while you have a consistent income? By investing in a Roth IRA, you will be putting money away for your retirement and paying tax on it, but when you withdraw it in your retirement years you will not need to pay any tax whatsoever!
3) Contribute to Your Health Savings Account
If you currently have the high-deductible insurance plan through your work, then you most likely have the option of contributing to a Health Savings Account (HSA). This is an excellent option and I would strongly recommend it as a way to both grow your money and to avoid paying taxes.
Your dollars are put into the HSA pre-tax and as long as you spend the money on medical products or services (this includes vision and dental as well), then you will never pay taxes on this money. Better still, if you have over $2,000 in your HSA account, then you can invest your money and grow it exponentially for your retirement years. And, if by the age of 65, you have not used the money on medical expenses, you can start withdrawing the funds for non-medically related purchases as well without penalty (although, you will pay tax at this point).
4) Invest in Your Home
As home prices are rising again, the strategy of buying a home, living in it for a while, and selling it for a profit is making more and more sense. If you are handy and have a knack for picking out properties that will increase in value, then this might be a great option for you.
All you have to do is find a foreclosure in an excellent neighborhood, move in, put your hands to work and restore the house to appeal to the masses. After two years you can sell the house for thousands of dollars in profits and pay absolutely no taxes on your earnings (up to $250,000). As long as home values steadily rise, this is an amazing opportunity for anyone to earn some tax-free money, not just retirees.
5) Draw From Social Security
If you earned an average wage throughout your working years, then your Social Security checks will not be taxed. As long as this program continues, this is a great way to earn a non-taxable income in your retirement years.
6) Earn Capital Gains, Not Income
If you have a large income and often pay many taxes because of your high tax bracket, then you might want to earn more of your money through capital gains where the standard tax is just 15%. Capital gains are paid on the money earned through the buying and selling of assets. This phrase is often used in reference to stock earnings, but could be used for any asset that is bought and sold for more than the purchase price. If you have the ability to buy low and sell high, then the cap on your tax payment is 15%. Not a bad deal.
How about you all? How are you going to avoid paying taxes in your retirement years?
Share your experiences by commenting below!
Technology Is Not Always the Answer
The following post is by MPFJ staff writer, Grayson Bell. Grayson, who runs the finance blog Debt Roundup, is a fan of personal finance, brewing beer, and working on cars.
There is no doubt we are a technically advanced society.
Almost everything we do revolves around technology. Some of our biggest advancements have spawned from the evolution of technology.
Just look at what the smartphone has done to our society. We are now instantly connected with people from anywhere. Not only that, but we can surf the web with a flick of our finger. The smartphone has almost killed the pay and home phone. They also allow us to get information quickly and easily. The same goes with email. Look at what it has done to our communication. The need for letters and mail has been reduced dramatically as we no longer have to write and send communications through “snail” mail. We can instantly shoot a reply right to your computer with a few clicks of a mouse.
By all standards, technology has allowed us to do some amazing things. We have been able to advance our healthcare, build better products and services, and the list goes on. While we all might think technology is the best thing since sliced bread, I do believe there is an evil side to technology. I think it is not always the answer.
Where Technology Goes Wrong
Don’t get me wrong, I love technology. My main job is revolved around it. I wouldn’t be able to blog like I do everyday without it. I do think it is an important aspect of our everyday lives, but it is not every part. At least not in mine. Over time, I feel we have lost some of our ability to comprehend what we learn around us.
Before technology was in mass, we had to absorb the lessons all around us. We would learn from other people right next to us. We would learn most of our skills from our parents, friends, teachers, and family members. We would think for ourselves and come to our own conclusions. I think technology has dumbed that down quite a bit. Have you ever been in a conversation with people who couldn’t answer any questions without looking them up in Google? Well, I have and it is utterly frustrating. I have met people where they couldn’t come to a conclusion to something without checking what people on Twitter said.
I am all for being connected, but it has been pushed to a point where we have lost our ability to think and comprehend for ourselves. Now we have to throw stuff out to the social world and see if they can help. Technology has slowly become the downfall of our basic communication skills.
How Technology Inhibits Us Financially
I have written before about how managing money is all about basic math. There is nothing fancy about it. This number plus this number minus this number. We all think we understand math, but I have seen otherwise.
With the influx of great financial technology like Mint.com or YNAB, we do not have to handle reconciling our money anymore. We can create a budget in software and have it hook to our bank accounts. We set up spending limits and then call it a day. The software takes care of the rest and notifies us when we are going wrong. I loved these services and still use Mint.com today. The difference between now and when I was first in debt is how I manage my money before I even look at Mint.
Now, I go back to basic math. I have brought the skill back where I can calculate how much items will be with tax before I even check out. I was never good at math in school. It didn’t interest me and I didn’t care. After I got into debt, numbers started to jump out at me. I looked everywhere to find numbers and found them in the strangest places. After a few years of getting back on my feet, I realized I had taught myself how to do complex math problems in my head on the fly. The better part is I could do basic math problems really quickly without the need of technology or calculators.
In order to get your finances back in shape, don’t be worried about stepping away from technology and relying on what your brain tells you. Remember, basic math will take you all the way you need to go with finances. If you need any complicated equations, then think about using a calculator or even put your finances in the trusty spreadsheet. Yes, it is technology, but you have to do all of the work and come up with how the math equations are run. I use spreadsheets for most of my numbers. Not only does it become a great budget spreadsheet, but it also is a fantastic math learning tool.
Technology is not always the answer to all of our problems. We have to remember technology was created by people who thought outside of the box and applied things they had stored in their brains. I do believe too much technology does make us a little dumbed down than we should be. Unfortunately, I have come across too many people that back up my statement. If we continue to over complicate how we manage our money, we might not ever understand the real reason we are having money troubles. Technology is going to be a part of our lives, but it doesn’t have to be every part.
How about you all? For your finances, are there certain areas where you prefer to do thing “the old fashion way?”
What technological tools do you use in your finances?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/katerha/5520292679/sizes/l
Get Rid of Clutter Once and For All and Stay Clutter Free
The following post is by MPFJ staff writer, Melissa Batai. Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food. She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.
You’ve likely heard stories about adult children who spend weeks cleaning out their elderly parents’ home that is full of trinkets from the 1950s as well as old games and toys their now grown children used to play with. When the parents pass away, the kids are left to sort through decades of “stuff” their parents acquired and never disposed of once they no longer needed them.
My husband and I are moving 1,750 miles from Chicago, IL to Tucson, AZ, in just two weeks. I’ve never moved that far (my farthest move previously was 7 hours when I was a grad student with very few possessions). Even though my husband’s new employer is giving us a moving allowance, I don’t want to move stuff we don’t need.
Over the last six weeks, I’ve been packing and weeding out clutter we don’t want to take with us. I was shocked and surprised by all the stuff we no longer need that we’ve held onto.
Baby Stuff
We have three kids, but our youngest “baby” is now 4 years old. Yet, downstairs I found:
- a crib,
- playpen sheets,
- baby and toddler clothes as small as size 12-18 months up to 4T that my daughter just outgrew,
- baby gates,
- outgrown Halloween costumes
Why, oh why, was I holding onto these things? The crib was wobbly by the time our third child outgrew it, so we weren’t even comfortable selling it. It just needed to be put out in the trash, but instead, it sat down in our basement for nearly two years. Why?
I listed the other items on Craigslist and a local mom group that I belong to, and all of the items were out of my house within 2 weeks, and I made close to $200. Why did it take a semi-cross country move to motivate me to sell these things? I could have done this two years ago, and enjoyed more space in my house, not to mention the extra cash.
Books
Another surprising find around our house? Books that I’ve held onto, in some cases, since college 20 years ago. What’s funny is that I haven’t picked up any of those books in years. I still love to read, but now I do my reading on the iPad or with books that I borrow from the library.
All of the many books went right to Goodwill. I had over 10 grocery bags full of books to giveaway!
Why Do We Hold On To Things That No Longer Suit Our Lifestyle?
Susan Bali, M.D. argues that we hold on to things because, “It’s hard to clear out the clutter. It’s also hard to continue to keep life clutter-free even if you do clear it out because ‘nature abhors a vacuum'” (Psychology Today). In other words, if you have empty space, you’ll find a way to fill it.
Keeping Items for Sentimental Reasons
What I found is that I held onto many of the baby items because I was sentimental about my children’s baby years. They’re growing so fast, and by keeping the crib, baby blankets, and tiny clothes, I felt like I still had a piece of those baby years that went so quickly.
Of course, that thought is completely irrational, which is why I got rid of all but a few outfits like the one I brought the babies home from the hospital in.
My husband, meanwhile, is sentimental about all of their little drawings and art projects. We have three bags worth downstairs that I still haven’t convinced him to trash. Here’s hoping that in the next two weeks, he parts with most of the artwork.
Just In Case I Need It
Another reason I personally kept a lot of stuff that I no longer needed was because I was worried I might need it someday. Years ago, when I had a desktop computer, I bought an ergonomic keyboard. I never ended up using it, but we kept it just in case my old keyboard died.
About six years later, it’s still in the basement collecting dust. I don’t even use a desktop now, just a laptop, so there’s no need for the keyboard.
So many of the things we think we might need aren’t really necessary. For most items, it’s easy to simply borrow them from friends or family temporarily or to rent them out, in the case of rarely used items.
Laziness
Finally, while I knew that a lot of the items downstairs need to go, decluttering and selling your stuff is time consuming. Honestly, if we weren’t faced with the prospect of a looming 1,750 mile move, I wouldn’t have devoted the hours I have to emptying out our basement.
It is far better to keep from accumulating clutter in the first place than spending hours purging it all.
How to Keep Your House Clutter Free
Now that I’ve cleared out the clutter and will have a clean slate, so to speak, in our new home in Arizona, my goal is to not let the clutter multiply again. I’ve set some ground rules for myself to keep the clutter at bay:
1. Ask yourself, “Do I really need this, or can I borrow it from someone else?” Our basement also held some tools that we bought 10 years ago for my husband to complete a project. Instead of buying the tools, we should have just borrowed or rented them. From now on, I want to see if there’s an alternative way to get something I may only need once or twice rather than buying it and letting it sit, unused.
2. Keep an area of your house where you can put things you want to get rid of. Once a month, I plan to do a sweep of my house and look for stuff that we no longer use or haven’t used in quite some time. I’ll put them in a box for donation or garage sale. By doing this monthly, I’ll be able to keep the clutter down. (I’ll also have to hide the box somewhere so my husband won’t come and take things out of the box and put them back in our home. He’s sneaky that way.)
3. Practice being content. So many times, we buy things just because we think they’ll make us look better or feel better when what we have already is often plenty.
Stuff usually doesn’t make us feel better. In fact, the opposite can occur. We can feel worse after buying something because we have less money (or more debt) after the purchase and more stuff cluttering our lives.
I’m trying to practice being a minimalist with my as well as my kids’ wardrobes. We don’t need deep walk in closets with tons of clothes. I do laundry nearly every day. Surely 10 or 20 pieces that we each love is plenty for our wardrobes. Of course, in our culture of more is better, paring my clothing down this much is a bit radical.
In the last month and a half, we’ve easily gotten rid of 1/3 of our possessions, and as the stuff goes out, I literally feel lighter and freer. Our house has more room; we’re no longer drowning in a home full of possessions we no longer need. I can’t wait to move into our new house and see all the space we’ll have!
How about you all? What things are you holding onto that you no longer need? What’s your favorite way to stay clutter free?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/joeshlabotnik/227041790/in/
Don’t Forget About Liquidity
The following post is by MPFJ staff writer, Grayson Bell. Grayson, who runs the finance blog Debt Roundup, is a fan of personal finance, brewing beer, and working on cars.
When I was paying off my debt, I was worried about getting it down to zero.
I was focused on my debt-to-income ratio and working to toward the optimal number. What I wasn’t focused on was my net worth. That has since changed since I paid off my last credit card.
I see many people talking about their net worth and how they have grown. They speak about their investments and their properties. All of their assets which go toward their net worth. The one issue I have found with some is they forget about one thing. Liquidity.
What is Liquidity
There are two forms of liquidity. There is what is used in accounting and what is used in economics. I am going to describe both, but for the purpose of this article, I will focus on accounting liquidity as it relates to your personal finances.
- Accounting Liquidity – This is simply the measure of ones ability to pay their debts when they are due. Basically, the ability to pay short-term obligations.
- Market Liquidity – This is a market’s ability to convert an asset to cash quickly. If in the market, it can be dealing with converting an asset to cash without affecting the price.
Based on these definitions, the most liquid asset is cash. It can be used to get goods and services quickly without affecting the value. When you have money socked away in bank accounts or savings accounts, then you have maximum liquidity. You can use that money quickly to get what you need, especially when paying bills.
Liquidity and Your Net Worth
When talking with people about their net worth, I get feedback about having property, cars, investments, and so on. What I don’t hear too often is money in their bank accounts or savings accounts. When you have net worth tied up in real estate, it means you don’t have much liquidity. You can’t convert your property into cash very quickly. If you needed to pay a bill in two days, you couldn’t get cash from your house in that timeframe.
Tangible assets are harder to sell when money is needed. This means they are less liquid. They can’t be easily converted to cash on the go. If you have investments, then you could have some liquidity to work with. Some investments, like retirement accounts, are harder to pull money out. While you can do it, it will cost you fees and sometimes taxes. This is especially true with 401(k), 403(b), and traditional IRA accounts.
I will always recommend people have some of their money locked up in investments. I think it is a great way to grow your net worth, but be cognizant of how liquid your money is. If you have an individual investor account, the understand how quick you can sell your assets and get cash. Are there any fees? How long does the money transfer take? The same can go with a Roth IRA account. While it is an investment account, you can take out contributions at any time without penalty. You cannot do that with the earnings though.
Maintain Some Liquid Assets
The main take away with regard to your net worth and how liquidity is to make sure you have some money available at all times for emergencies. You can call it your emergency fund, rainy day fund, or whatever you wish. No matter what you call it, just make sure you have some way to get cash out from your assets in order to deal with emergencies.
While growing your net worth is a great goal, remember to understand how diversity plays a part. You need to make sure to diversify your assets and have a mixture in cash, investments, real estate, and any other forms. The concept of liquidity is not hard to understand, but people often forget about it. If you want a well-rounded financial picture, then look at how liquid your assets are.
How about you all? Do you feel you have enough liquid, easily-accessible assets/cash if you needed it in a hurry?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/vox_efx/3577733056/sizes/m/
Interested In Investing In Trust Deeds? Here’s What You Should Know
The following is a post by MPFJ staff writer, Toi Williams, who is a professional personal finance blogger of Fine Tuned Finances. She has backgrounds in personal finance, sales, and real estate.
The loose lending practices of past years have resulted in many banks carrying large amounts of bad real estate loans on their books. In the attempt to unload foreclosed properties, banks are allowing these properties to be sold at bargain basement prices.
Real estate investors are purchasing these properties cheaply, rehabbing them if needed, and then selling them for a profit. Unfortunately, banks are reluctant to lend to these types of borrowers unless the borrowers and the properties they are interested in adhere to a strict set of criteria.
Trust deed investing allows investors to invest in these types of real estate loans without the assistance of the banks.
Trust deed investing, which is secured by physical real estate, provides a way for real estate investors to get the money that they need to purchase properties while funding investors earn an attractive return on their investment.
The Benefits To Investors
Investors can realize a number of benefits by investing in trust deeds. Many of the investments made in trust deeds are relatively short term, maturing in five years or less. Due to the scarcity of funding, the investment can be made at an interest rate much higher than the investor would get with a certificate of deposit (CD) or by purchasing municipal bonds. The borrowers are often willing to pay double digit interest rates for the loans because they plan to make much more on the sale than they are paying in interest for the funding.
When trust deed investments are structured properly, they can offer investors an attractive yield with a risk level that is relatively low. It is not uncommon for trust deed investors to earn annual returns in the high single-digits, which is paid in monthly installments. This makes trust deed investing a very favorable option relative to other investment options with similar risk profiles.
If the borrower defaults on the loan, the lender can foreclose on the property and sell it to recoup the investment, plus any past due interest. The key is to focus on investments that are sufficiently conservative, meaning that the value of the property is high relative to the amount of the loan. If the borrower defaults on the loan, the lender will not lose their entire investment.
Disadvantages To Investing In Trust Deeds
One of the biggest disadvantages to investing in trust deeds is that the investment is not liquid. You cannot quickly convert the investment to cash at need, like selling shares in a blue chip company or municipal bonds. At the onset of the investment, you need to go in understanding that you must stick with your investment until the borrower pays off the loan or until you have foreclosed and sold the underlying property in the case of a default.
It is important for the investor to do their research before they begin directly investing in trust deeds. The investor must take the time to review borrowers’ information, determine the merit of the deal, and perform due diligence on the property. Errors in documentation could mean that the investment you are pursuing is much riskier than it appears. Errors and misrepresentations could also result in litigation or other legal issues for the investor.
How To Invest In Trust Deeds
There are four main investment methods available when it comes to investing in trust deeds.
Some investors choose to personally source individual loans and lend money directly to real estate investors that are within their network. Other investors choose to purchase loans backed by real estate from brokers or invest in a fund that invests in trust deeds. The last method is for the investor to identify people who are directly investing in trust deeds as a group and invest along with them. Many individual investors opt to use funds and brokers because it gives them access to professional real estate investors that are investing on their behalf based on the specific investment criteria the individual investor has set.
Where To Find Trust Deed Investment Opportunities
LoanMLS (http://www.loanmls.com/) – LoanMLS is an online loan exchange that allows investors to search for various types of trust deeds investments, which may be for an individual loan or pools of loans and may be for any type of loan: residential or commercial, secured or unsecured. New trust deeds are listed on LoanMLS every day.
Federal Home Loans Corporation (http://federaltrustdeed.com/) – The Federal Home Loans Corporation services individual trust deed/mortgage loans of any size for brokers, lenders, institutions and private investors. Their comprehensive nationwide Trust Deed Loan Servicing solutions allows them to service fractionalized loans with ease using computer-driven computations.
Wilshire Finance Partners (http://www.wilshirefp.com/) – Wilshire arranges real estate loans secured by deeds of trust held by their investors on residential, multifamily, retail and commercial property located throughout California. The minimum investment is $50,000 for individuals, trusts and qualified retirement accounts.
American Private Money Group (http://www.americanprivatemoneygroup.com/) – American Private Money Group offers high-yield trust deed investments in properties in California to private individuals, corporations, pension plans, 401Ks, retirement funds, IRAs, Roth IRAs, Self-Directed IRAs, and SEP accounts.
The Norris Group (http://www.thenorrisgroup.com/) – The Norris Group offers high-yield trust deed investments to private individuals, corporations, pension plans, 401Ks, retirement funds, IRAs, foundations, endowments, Roth IRAs, Self-Directed IRAs, Charitable Remainder Trusts (CRTs) and SEP accounts. The Norris Group is a California Department of Real Estate licensed Broker (DRE License 01219911) and has brokered more than $250 million dollars of loans since 1997.
Crawford Real Estate Services (http://www.crawfordinvestmentco.com/) – Crawford is a Trust Deed Investment Company (TDIC), fully licensed by the California Bureau of Real Estate, with a 55-year history of investing in Southern California communities. They only accept investors that are California Residents.
So, what do you all think? Have you or anyone you know ever invested in trust deeds? Does it sound like something you’d be potentially interested in? Why or why not?
Share your experiences by commenting below!
Retirement Has Nothing to Do With Age
The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.
A few days ago, my boss suddenly realized that one of our coworkers was retiring. He looked around at everyone and quickly said, “Retiring? I didn’t realize he was that old!” For an intelligent man that does well in his director level position, my boss made it very clear that he has absolutely no clue what retirement really is or how to get there.
Retirement is Not About Age
Frankly, I couldn’t believe that my boss made that statement, but even more to my surprise many of the people around us nodded their heads in agreement, and this guy (that was retiring) was easily 60 years old! Heck, what if I walked into the office at age 30 and announced that I was retiring? Most people would probably think it was a joke. But retirement has absolutely nothing to do with age!
Many people believe that once you turn 65, it’s time to retire. You can collect your full Social Security payment and you have a few aches and pains, so it must be time to retire. Hold on, not so fast. What about that mortgage payment on your $275,000 house? And how about that leased car in the driveway – your Social Security check won’t be able to cover that. Just because you’re 65 years old does not mean that you can automatically retire. As with most these days, you might have to work a couple more years to make ends meet before you get the luxury of quitting your job.
In other words, retirement is not at all about age. It’s about your finances.
Retirement is About the Dollars!
Earlier in this article, I said something about retiring at age 30. Do you believe that that’s possible? You might not know anyone that has done it, but what if I had created a popular app for the iPhone that had millions of downloads? I might have $7 million in the bank from this successful venture (I don’t by the way….yet), so why wouldn’t I be able to retire? I mean, I could withdraw $200,000 a year from my lump sum and it would still easily increase in value! Yup, I could easily retire for the rest of my life on $200,000 per year.
Since I am not an app writer and cannot think up addictive games in my spare time, I am trying a more conventional route: real estate. I am currently paying off my own house so that I can quickly purchase other properties with cash (for a discount of course – that is the beauty of cash) and rent them out for a tidy yearly profit, all while continuing to work my full-time job to fund the next house. Because I live very inexpensively, I can save up enough money to buy one house each year. Here is my schedule of planned purchases:
- 2016: Purchase rental property #1. Earn $850 per month
- 2017: Purchase rental property #2. Earn $1,700 per month
- 2018: Purchase rental property #3. Earn $2,550 per month
- 2019: Purchase rental property #4. Earn $3,400 per month
- 2020: Purchase rental property #5. Earn $4,250 per month
At this point, I would be earning $51,000 per year on top of my full-time job income. I will be 35 years old. It wouldn’t take much more of this to retire would it? In just a couple more years, I would have over $1,000,000 worth of homes and could generate an income of over $80,000 per year. Not too shabby huh? And I didn’t even have to be 65 years old to do it.
How about you all? Do you know of anyone that retired young? How did they do it?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/paulodonnell/5052028917/
Saving For Retirement: Calculating How Much You Need
The following is a post by MPFJ staff writer, Toi Williams, who is a professional personal finance blogger of Fine Tuned Finances. She has backgrounds in personal finance, sales, and real estate.
Retirement planning is a very important part of your future financial security, but it is often the most difficult part of financial management to accomplish. One of the main reasons why it is so difficult is because there are a lot of unknowns that have to be estimated to arrive at a good number to set as a retirement savings goal. When you are in your twenties and thirties, it is hard to imagine what your life will be like when you are in your sixties and seventies.
Fortunately, there is a formula and process that you can use to calculate how much you would need to save to maintain your current lifestyle during your retirement years.
Step 1 – Calculate The Cost Of Maintaining Your Current Lifestyle
The first thing you should do when calculating how much you will need to save for retirement is calculate how much it would cost you to maintain your current lifestyle in your retirement years.
The cost of maintaining your current lifestyle may be slightly lower during your retirement years because there will be some expenses that you will no longer have to pay. For example, you will no longer have to pay the various costs associated with being employed, like purchasing business clothing or transportation costs to and from work.
A good assumption would be that you would need about 80 percent of your current salary to maintain your current lifestyle in retirement. So, if you make $70,000 per year now, you can estimate that you would need $56,000 per year during your retirement. On paper, the calculation would be 70,000*0.8=56,000
Step 2 – Add In Inflation Increases
When doing their retirement planning, many people forget that inflation will have an effect on the future value of their money. Because of inflation, one dollar today does not have nearly as much purchasing power as one dollar had thirty years ago. Thirty years from now, a reasonable assumption would be that one dollar would buy much less than it does today.
To compensate for the inflation that will affect the cost of goods and services in the future, you should add in inflation increases of 3 percent per year for every year up until you expect to be retired. If you are 35 years old now and you expect to retire when you reach 65, you will have 30 years of inflation to contend with when you retire. Using Google’s search bar, the calculation would be 1.03^30, which totals 2.4273. This number should be multiplied by the previously calculated amount ($56,000) to arrive at the amount that you would need to maintain your current lifestyle during your retirement years after inflation, which would be $135,929 per year.
Step 3 – Subtract Your Retirement Income Payments
Many people will receive retirement income payments during their retirement years that will be used in place of savings for spending.
These payments may include payments from the Social Security Administration, pension payments, payments from annuities or other savings vehicles, and any income you expect to receive during those years. These estimated retirement income payments can be subtracted from the inflation-adjusted cost of maintaining your current lifestyle, allowing you to reduce the overall amount that you need to be saving. For example, if you expect to bring in $35,000 per year during your retirement years in social security payments and other income, you can reduce the amount that you will need to save to $100,929 per year for each year of retirement.
Step 4 – Determine How Long You Will Be Retired
Determining the amount of time that you will be retired is where the calculation gets tricky because you have to estimate the age you will be when you retire and the age you will be when you die. Although no one knows what will happen in the future, many people in good health can reasonably assume that they will work until they are 65 and will live until they reach their mid-eighties, an estimate of roughly 20 years. When the amount that you need to save each year is multiplied by the number of years that you expect to be retired, you get the amount that you would need to save before you retire. In our example, the person would need to save $2,018,580 to ensure that they have enough money to live comfortably during retirement.
While $2,018,580 sounds like a lot to save, if you were to get started now, you would have thirty years to try to save the amount. You will also be taking advantage of compounded interest on your savings, helping your money grow faster and reducing the amount you must divert from your paychecks. The sooner you start saving, the more compounded interest you will earn over time, allowing you to reach your goal more quickly than you would think. You can also increase your retirement savings by diverting bonuses, income tax refunds, and other windfall payments into your retirement accounts.
How about you all? Have you made a plan and figured out “the number” you need to save for retirement? What have you experienced while trying to reach your retirement saving goal?
Share your story with us by commenting below!
***Photograph courtesy of http://www.flickr.com/photos/fishyone1/9559556453/
Why We Invest In Infrastructure as a Society, Community and Individuals – Part 1
The following post is by MPFJ staff writer, Sally. Sally is the blogger behind TinyApartmentDesign.com, a blog about design, living well, and simple, tiny spaces. Enjoy!
Without really meaning to, I’ve spent my entire career working on different aspects of commercial and public infrastructure.
It’s ranged from the payments industry to transit/transportation and construction. I never connected the dots, but each of my jobs has been in industries that tackle big issues, albeit my role has been miniscule in the process.
Infrastructure is about putting the tools and systems in place to allow societies and individuals to meet certain needs. This can range from systems that allow you to use the same method of payment across the country, to creating public spaces that can be used for recreation, education and community events. It’s about having a network of roads, gas stations and more recently, electric charging stations to allow you to drive across country without it taking several weeks in a covered wagon. It made me think about what types of infrastructure do we develop as individuals? And is the infrastructure system we have in place a key to our success?
Infrastructure that Keeps You Healthy
If you can view your own life through the lens of infrastructure, it may help you save time and heartache by simply viewing your daily activities through this filter. You can ask yourself if you have created a system to keep your body healthy in a routine, simplified way. Do you have healthy foods on hand at home? Do you keep some snacks with you in your backpack, in the car, or at the office so you can avoid sugary snacks? Is it easy to reload these foods? Is your grocery store nearby or on the way home? Do you have a standard list of items you need to replace weekly?
Exercise is another part of your health infrastructure. Do you play a sport that can be practiced daily? Yoga, surfing, Pilates, tennis and swimming are just a few sports that you can take up as daily play. But you’ll need to make sure they fit your lifestyle. If the nearest yoga studio is 50 minutes away, and you don’t like to practice alone, then yoga may not fit into your current infrastructure. On the other hand, if you find a sport or class that you can commit to playing daily, especially in the mornings, then that may quickly become embedded in your infrastructure. From there, you can further establish this part of your lifestyle by packing your workout clothes the night before, and placing the gym bag where you will see it when you wake up. If the infrastructure makes sense, it will be used more frequently, and it will lead to more positive elements being added to this infrastructure: such as having all of the ingredients for a green smoothie ready to go in the mornings, or keeping a mix of upbeat music for your workout on hand in your car or as a playlist on your phone.
All of these must work together properly when it comes to infrastructure. If something wasn’t properly planned, it will be discarded and abandoned. We learned this quickly in construction. If you built a ticket machine for a light rail station on the opposite end of where all passengers entered the station, it would be abandoned for the machine nearby, where people were nearby to ask questions, or learn from as they bought their tickets.
In the next part of this two-part post, I’ll examine infrastructure as it relates to managing your finances and fitting them into your overall life infrastructure.
How about you all? Do you view your life as a system that can be organized and ordered? Or are you living in total and utter chaos?
Share your experiences by commenting below!
***Photo courtesy of http://www.sxc.hu/photo/66986
Get Rich With Index Funds
The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.
Have you ever heard of the term, “Index Fund?”
Don’t feel bad if you haven’t, but if you fail to learn about this term today, you may be leaving tens of thousands of dollars on the table.
I assume that many of you are familiar with the term, “Mutual Fund”. You might not know exactly what it means, but you know that it is a type of investment that you can purchase within your 401(k), and this is absolutely correct. An Index Fund is actually not all that different in principle, but I definitely prefer one over the other. Here’s why:
The Difference Between a Mutual Fund and an Index Fund
Mutual funds and index funds are both investments that can be purchased to increase your current savings and are often used to beef up your retirement account for the many years that you have before that last day on the job. While both of these funds essentially serve the same purpose, they are actually quite a lot different.
Mutual Fund –
A mutual fund is a managed account that often invests in a certain segment of the market.
For instance, there is most likely a fast food restaurant mutual fund that invests in McDonald’s, Burger King, Wendy’s, Arby’s, and many other fast food chains. The reason it is called a mutual fund is because it is mutually funded by many investors, allowing it to be affordable for each person. So, instead of having to buy one of each of these company shares for $50 a piece (which could easily total up to $1,000 with 20 company investments), you can purchase a small portion of each share (since all of the other investors do the same thing, which then totals enough money to buy whole shares) for a total of $50, instead of that $1,000.
Mutual funds are a great way to diversify your money when you don’t necessarily have a lot to invest. Also, many people believe that mutual funds are superior to individual investments because of the expertise of the fund manager and his/her team. Since they are constantly evaluating the market and its movements, investors believe that they can buy or sell stocks before the majority of stockholders even know there might be a problem or opportunity. If this is the case, then mutual funds are a great way to beat the market (meaning, earn a higher percent than the average stock market investor).
Index Funds –
An index fund is similar to a mutual fund because it also is made up of a large number of company stocks and easily invested in because of the many investors involved to fund the overall account. However, instead of the fund matching a particular segment of the market, the stocks are purchased in order to imitate a particular Index (like the Dow, Nasdaq, or S&P500). In other words, index funds are set up to earn you the same amount that the average investor would, but with a very hands-off approach.
The Research-
Many people swear by their mutual funds and believe that their investments are earning them more than the overall market (meaning, they are beating the market). However, many studies reveal that this is often not the case. While the gross earnings may be higher than the market, there are many fees that need to be considered as well. The largest of these fees are the management fees (totaling 1% or more of your total fund value each year), and then there are some other front-end and back-end fees that are charged when entering or exiting your money.
On the other hand, since index funds are incredibly simple and do not require a large management team, the fees are very small (often less than 0.1%) and do not hardly affect your investment at all.
By investing simply and keeping my investments in index funds last year, I earned almost 30% on my money. That is massive! And, because I am not employing a team of people to try to beat the market, I am able to keep the majority of these earnings as well.
If you are looking to invest for your retirement, I would advise that you look into a few index funds. You’ll earn more and be able to worry less. It is a simple, easy, and effective way to invest.
How about you all? How do you have your money invested? Do you use mutual funds, index funds, or something else all together?
Share your experiences by commenting below!
***Photo courtesy of http://www.flickr.com/photos/epsos/8450504146/sizes/l/
Should You Pay Off Your Mortgage Early?
The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.
Have you ever thought about paying off that mortgage faster than the typical 30 year term?
Is it a smart thing to do? What are the pros and cons of doing so? These are all great questions and should be considered carefully. Let’s dive into each of the positives and negatives of doing so, and then you can make a confident decision of what you want to do.
The Interest Expense
When buying a house, most people put a little bit of money down, but then take out a 30-year loan for the majority of the remaining payment. If your loan percent is 4.5% or so on a $250,000 house, then you can plan on paying an additional $180,000 in interest. That’s right, you will pay a total of $430,000 on your $250,000 home.
This sounds like a great reason to pay the house off early, but many home-owners think that they can earn more than 4.5% by investing their money instead of paying off their loan quickly. So, they decide to keep the loan for its 30 year life, but invest a few hundred bucks in the market each month to build their retirement fund.
While this does make sense, many people don’t actually invest the money that they said they would. Instead, it goes toward a new boat or new car, which depreciates in value and often costs them much more in the long run than if they would have put the money toward their home mortgage. By putting extra money toward the home loan, you are guaranteeing yourself a 4.5% return, which isn’t amazing, but it’s something.
Mortgage Tax Deduction
Many people are advised to keep their mortgage because of its tax incentives. Because you are paying interest on your loan, the government will reduce the taxes that you owe each year.
It sounds all well and good, but this is how it really works. You pay in 4.5% on your home loan each year and because of this, the government will not tax you on this payment, which essentially pays you back 1% or so. In other words, you pay in $5,000 in interest each year to avoid $1,250 in taxes paid in. By doing the math, you are essentially still losing $3,750 on this deal. Do not buy a house and pay the interest just to avoid tax payments. It makes absolutely no sense.
Cash Flow
One of the best ways to get wealthy today is to increase your cash flow.
With more cash each month, you have more opportunity for investing and can then increase your overall wealth much faster than your neighbor down the street (who is making payments on everything you see in his yard). To do this effectively though, you basically need to reduce your cash flow to nothing for a few years while paying off your mortgage debts. Many choose to keep their mortgage and stock up their reduced cash flow (after they pay their mortgage) each month. In the end, the difference may be negligible, but I believe that there is much more power in that large cash flow only a few years later when your mortgage payments are gone. Just think of how much cash you would have each month if you no longer had to pay your mortgage!
My Biased Opinion
I’m sure you already know my opinion of whether you should pay off your mortgage or not. Over the last couple of years, I have reduced my consumer debts from $45,000 down to zero, have saved up $15,000 for emergencies, invest over 15% of my income, and am now working to eliminate all of my mortgage debt ($54,000) by the end of this year.
If I can accomplish this, I will owe absolutely nothing to anyone which means I can freely give as much as I want and invest as much as I want – all before the age of 30. With absolutely no payments, do you think I could become wealthy in the next 40 years of my life? Absolutely! And, if you begin working toward debt freedom, I believe that you can soon be wealthy as well.
How about you all? Do you think it’s best to pay off your mortgage as soon as possible, or only pay the minimum required and save the money for later needs?
Share your experiences by commenting below!
***Photo courtesy of http://www.flickr.com/photos/68751915@N05/6808984167/sizes/l/